The euro and growth-linked currencies were on slippery ground on Monday as risk appetite was subdued on the back of mounting fiscal worries in the eurozone and lingering concerns about a global tax on banks. Traders said investors were sceptical of the Group of Seven's reassurance on Greece and every move up by the euro was being used as a selling opportunity.
At the weekend G7 meeting of finance ministers and central bank governors, no new statement on currencies was issued, but support was rising for a levy on banks that could pay for global governments' rescue of the financial system. Last month US President, Barack Obama spooked financial markets when he proposed tough reforms for the banking sector.
In addition, while US jobs data on Friday underscored a continued improvement in the labour market, it did not pack enough punch to give a strong boost to risk appetite, keeping growth-linked currencies on the defensive against the yen. "Market players think the yen might weaken in the longer term, but that trend has not taken hold yet," said Akira Hoshino, chief manager at Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department.
"We will not see that kind of market unless market players start taking on risk and building up their positions," he said. The euro fell 0.3 percent from late US trading on Friday to $1.3637, edging back towards an 8-1/2 month low of $1.3585 hit on trading platform EBS on Friday.
The single European currency has shed around 10 percent from a 15-month high of $1.5145 hit in late November, as jitters about the fiscal problems in Greece spreading to Portugal and then to Spain intensified. The euro fell 0.2 percent against the yen to 121.81 yen, after dropping to 120.70 yen on Friday, its lowest in about a year.
The euro may have fallen far enough to entice buying by some Japanese investors. Japan's Nippon Life Insurance Co, which manages 46 trillion yen ($515 billion) in assets and is the nation's biggest life insurer, said on Monday it could buy euro zone bonds without currency hedging with the euro at about 120 yen.
Nippon Life said it did not own Greek bonds and that fiscal woes in the euro zone had not affected its investment plans so far. The yen was broadly higher and hovered near a 10-month peak against sterling and its highest in nearly seven months against the Australian dollar. The Japanese currency rose to those highs last week.
Investors tend to buy the yen and dollar in times of heightened risk aversion as they unwind leveraged carry trades. In carry trades, investors sell lower-yielding currencies to invest in higher-yielding currencies and assets. The dollar index, was steady at 80.441, not far from a high of 80.683, its strongest since July 2009.
Market players reckon the yen could weaken later this year given the possibility that the Bank of Japan may take further steps to ease monetary policy to support an economy caught in deflation, or at the very least keep interest rates near zero.
Such an outlook contrasts with market expectations that the US Federal Reserve may raise interest rates later this year. Japan's Dai-ichi Mutual Life Insurance Co told Reuters in a recent interview that the biggest investment risk this year would be a rise in US interest rates, adding that it expects the dollar to climb to 105 yen by the end of 2010. The dollar was steady against the yen at 89.32 yen.
One factor that may support the yen in the near-term is possible fund repatriation by Japanese corporates and investors ahead of their end-March book closings, market players said. The yen may also draw support if Japanese retail margin traders unwind their bets against it.
Retail investors trading on the Tokyo Financial Exchange increased their net long position in the Australian dollar against the yen to a record high of 213,888 contracts or roughly A$2.14 billion on Friday, having nearly quadrupled their net long position in the Aussie in the past month.